Work detail

Stress testing the italian banking system during the global financial crisis

Author: Mgr. Jacopo Messina
Year: 2011 - summer
Leaders: PhDr. Petr Gapko Ph.D.
Consultants:
Work type: Masters
MEF
Language: English
Pages: 93
Awards and prizes:
Link:
Abstract: This study performs a stress testing exercise on the Italian banking system in
view of the 2007 nancial crisis which was triggered by the crash of subprime
mortgages. At the base of the global nancial crisis was a failure of nancial
regulators to quantify the accumulation of endogenous risks. Following
the crisis, stress testing has acquired particular emphasis in the eld of risk
measurement under the Basel II supervisory framework. An econometric relationship
between the probability of default and the macroeconomic indicators
is modeled according to the Merton approach for structural analysis using data
on the Italian banking system. A latent factor model is employed to understand
the dependence of the credit risk on the changes in the macroeconomic
environment. The resulting relationship is exploited to compute the capital
requirement under stressed conditions in order to draw inference about the
resilience of the Italian banking system.

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